Mortgage stress: your alternatives

01
.Introduction

Despite the easing of interest rates by the Reserve Bank, hundreds of thousands of households across Australia are believed to be experiencing mortgages stress, according to a January 2009 report by Fujitsu Consulting. It estimates that the number of households in mortgage stress was at 635,000 in December 2008, even after a 3% drop in official interest rates in 2008.

And while further rate cuts by the Reserve Bank in 2009 should help to take many families out of the stress zone, the prospect of rising unemployment could make mortgage repayments unaffordable for many in the coming months and years.

Please note: this information was current as of February 2009 but is still a useful guide to today's market.

In this report, we explain a range of options available if you’re experiencing mortgage difficulties. The option (or mix of options) that's best for you will depend on your personal situation and the degree of financial difficulty you’re experiencing. We also tell you about dodgy solutions to avoid, explain where to get help, and give links to other useful information.

Your options

Mortgage stress is generally defined as having to pay more than 30% of after-tax income on housing loan repayments. In severe cases, mortgage stress can lead to missed repayments and repossession. If this describes you, here are some options for coping with the situation.

Contact your lender and negotiate

If you’re really struggling and likely to default on a mortgage payment, your first priority should be to contact your lender and negotiate an affordable repayment arrangement. Avoid a situation where your lender repossesses the house and sells it. Mortgagee sales are often sold at well below market value.

As soon as you get a default notice you need to act, as the lender can repossess your house within a very short period. Be honest and explain what the problem is. Lenders who are members of the Code of Banking Practice or the industry body Mortgage and Finance Association are obliged to explain your options and what temporary relief or assistance might be available.

The Uniform Consumer Credit Code (UCCC) allows those in temporary difficulty to extend their loan term to reduce regular repayments, and to postpone the date when payments are due.

If the lender refuses you a hardship variation, you can apply to have the matter considered by the relevant tribunal or court in your state. You could also complain to the lender’s External Dispute Resolution Scheme, or if you live in NSW, the CTTT.

You may also be able to negotiate with your lender for other changes to your loan. For example, a loan repayment 'holiday', accessing equity that you’ve built up in your home, restructuring your loan, or refinancing (see below).

Consumer lawyers say many people don’t know about their right to a hardship variation and the law doesn’t require lenders to explain it. "From our experience borrowers are generally not aware of their right to make a hardship application and we see many tragic situations where, had they been aware, the borrowers could have avoided an improvident refinance and eventual loss of their home," says Legal Aid NSW. It strongly supports a recommendation made in a 1999 review of the Code, that borrowers should be advised of the right to make a hardship application when they are sent default notices.

Should you withdraw super?

Hardship provisions allow for early withdrawal of super by people who are in serious financial difficulty. There’s been a dramatic increase in withdrawals for this purpose – $175 million in 2007, a 130% increase since 2005.

This option is a dangerous last resort. For most people, early super withdrawal is a trap, and one that’s been used by unscrupulous and predatory lenders. “These poor people end up with no home and no superannuation,” said Allan Shearan, Member of Londonderry, in the NSW Legislative Assembly in May. “The only beneficiaries are the predatory lenders.”

It pays to be aware of the risks, and watch out for illegal early access schemes. Some lenders are sending 'super access' forms to consumers, but there may be better options. Avoid accessing super if it is inevitable that you will lose your home. If you have to declare yourself bankrupt following repossession of your home, your super will only be protected if you didn't access it. You don't want to lose both your home and your super.

Get your lender’s best rate

If you’re making repayments at your bank’s standard variable rate, you could be paying over the odds. Discounts of up to 0.7% are available if your loan balance is more than about $150,000.

You may save interest by switching to your lender’s 'basic' loan. It probably won’t have the bells and whistles or flexibility of a standard variable loan — such as a redraw facility or offset account — but it should have a lower interest rate.

Remember that you'll need to make these changes before defaulting on a payment, as it's unlikely you'd be able to do so if your loan is already in default.

Refinance

Refinancing means switching to another type of loan from your lender, or changing to a completely different lender. If you’re paying an interest rate or fees that are way above the best on the market, you might save money by refinancing. But be aware of the traps.

There are risks with switching, particularly if it’s a response to mortgage stress. Refinanced loans are more likely to go into default. According to ANZ, traditionally about 30% of defaulting customers refinance with another lender, although the figure has decreased to 12.5% recently

Don't refinance to a high cost lender and avoid predatory lenders and dodgy refinancing brokers. Also, bear in mind there can be significant costs to leave your current lender — for example, exit fees, legal fees and early repayment fees — while setting up a new loan can incur establishment fees and other costs. Weigh it up carefully before making a decision.

See our report on Refinancing your home loan for more information.

Ask your lender to extend the term of your loan

This means asking your lender to reset your loan to a term of say 25 or 30 years, to reduce your monthly repayments. But remember, even though your immediate repayments will be reduced, you’ll pay much more interest in the long run.

A range of new loans with terms of up to 40 years are now available, but be aware of their risks. See Risky home loans.

Sell up and move

If you’re struggling to make your present mortgage payments, you’ll need to decide at a pretty early stage whether you can afford to keep your home or whether selling is inevitable. It's better to sell on your own terms.

It may seem drastic, but in some cases it could be sensible to sell your current property and move to a more affordable suburb or smaller property (downsizing). You could also consider renting for a while.

Earn more income

If you have a spare room in your house, renting it out could provide you with a much needed source of extra income, and help with your loan repayments. However, check out the tax consequences with a professional first. You’ll have to pay tax on the rent and capital gains tax when you sell your home. Get advice before acting.

Another option could be to lease your property and use the income to repay your mortgage, while living temporarily with a relative or friend.

Have you tried asking your employer for a pay rise, or considered looking for a second job for a while?

Examine your investments

If you have investments and are experiencing difficulty paying your home loan, consider selling your investments or getting licensed financial advice. Given all the recent turmoil in stock markets, if you have risky investments in your portfolio, now could be a good time to reduce your exposure to volatile markets (licensed professional advice could also be needed).

Don’t borrow too much

If you haven’t yet entered the property market, wait until you’ve saved a sufficient deposit before buying a house. That’ll mean you can buy a nicer place and/or have to borrow less. In the long run this will save you a fortune in interest.

Try not to put yourself under too much pressure with a loan that you can’t really afford to repay.

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02.Dodgy refinancing brokers

If you're struggling to make your mortgage payments, you might be tempted by broker and lender advertisements that promise easy solutions to your debt problems. Such offers should be taken with a large quantity of salt.

In the past we've seen 'debt reduction', 'mortgage minimisation' and other schemes promising to unlock mysteries and provide new ways to clear your home loan sooner. Some suggested you could repay your loan quicker without making extra payments or even benefit by paying thousands of dollars for a plan that explains how you can save, you guessed it, thousands of dollars.

However, there are significant traps with these arrangements, which are targeted at people who are vulnerable and in debt.

A report by the Australian Securities and Investments Commission (ASIC) looked at case studies of people who had refinanced (or switched their loan to another lender) as a response to mortgage stress. ASIC found that the brokers had essentially ripped these consumers off and left them in a much worse position than before.

Two brokers who marketed themselves as 'refinancing experts' were analysed in detail by ASIC. The investigation found that:

The brokers charged fees to borrowers of more than 20% of the remaining equity in their home.

These fees were up to 22 times the industry standard.

The highest fee was $24,320 and the smallest was over $20,000.

ASIC also analysed the financial position of three borrowers who refinanced and found that:

The refinance cost them, on average, 27% of the equity they’d built up in their home.

All three brokers arranged loans with higher repayments.

Within twelve months of refinancing, all three borrowers had lost their home or had defaulted on their repayments, meaning they had to sell their home.

03.Non banks to blame?

Banks have the lion’s share of the home-loan market, but the Australian Bankers’ Association claims that between 65% and 80% of mortgage repossession applications to the courts are by non-banks. One in two people calling the Consumer Credit Legal Centre in NSW concerning mortgage problems had borrowed from non-banks.

So who are these lenders? Well, it’s hard to know. A 2007 report by the ACT Consumer Law Centre analysed the lenders that took repossession actions in ACT between 2002 and 2006 and found that companies such as Perpetual Trustees and Permanent Custodians, which often act as the trustee companies for mortgage investment funds, topped the list. But the names of the lenders that consumers borrowed from aren’t disclosed.

A 2007 list for NSW reveals that less well-known non-bank lenders such as Circuit Finance and Lawteal Seconds also appear regularly in the repossession cases. Of course, mainstream bank lenders feature prominently too, but non-banks are over-represented, given their relatively small share of the market. 75% of complaints received by the Credit Ombudsman are about non-members — lenders don’t have to join this scheme if they don’t want to.

Of the four companies named above, only Perpetual Trustees is a member of the industry group, the Mortgage and Finance Association of Australia (MFAA).

Perpetual acts as a custodian and trustee for mortgage trusts and other mortgage investments, so it appears on the repossession lists. “Perpetual is the trustee for the majority of securitised lending in Australia,” a spokesperson said. “As trustee, our role is to secure assets and hold these in trust on behalf of capital markets investors who provide the funds for these loans. As such, our name appears on the associated loan documents as the lender of record.”

Similarly, Permanent Custodians doesn’t lend to consumers, but acts as the trustee for loans that banks and non-bank lenders arrange. When these loans go into default, Permanent Custodians' name, rather than the lender, appears in court repossession actions.

Types of non-bank lenders

The MFAA, which mainly represents mortgage brokers and non-bank lenders, points out non-bank lenders shouldn’t be tarred with one brush. It says there are three types of non-bank lenders:

Lenders of prime (standard) loans whose default rate is little different to banks’ standard loans. “These non bank lenders are not involved in repossession actions any more than bank lenders,” the MFAA says. “The default rate for prime loans is about 0.4%.”

‘Non-conforming’ lenders (which offer ‘low-documentation' loans, known as ‘sub prime’ in the US). They lend to riskier customers and, according to the MFAA, this means they’re likely to have a higher default rate, of about 5%. "Therefore these lenders are more likely to have a higher representation amongst repossession actions."

Predatory lenders The MFAA says there are fringe lenders who prey on vulnerable borrowers. They’re also known as predatory lenders. “Because their business model anticipates a fairly quick default by borrowers who should never have been lent money in the first place, a considerable proportion of their loans finish up in repossession actions,” the MFAA says.

In 2007, consumer groups joined with industry groups including Abacus (which represents building societies and credit unions), the Australian Bankers’ Association and MFAA, to form a coalition to tackle the problems of predatory lending.

04.Financial counsellors plus case study

If you're in a difficult financial situation due to the interest rate rises it's a good idea to talk to a financial counsellor.

A counsellor can help you consider the options you have. For example, you may be able to take advantage of hardship provisions under the Consumer Credit Code (UCCC). The counsellor may also assist you in negotiating with your lenders. Contact details are below:

Case study

David Tennant, Principal Solicitor with the Consumer Law Centre of the ACT, is at the front line of the battle against predatory lending. Most of his current clients have had problems with their mortgages and have either lost their homes or are facing repossession. Many of the problems arose after switching to a non-bank lender.

“Many of the clients I speak to have borrowed from non-banks. Often they’ve refinanced — once or several times — usually from mainstream to non-mainstream lenders. The problems might become obvious when they failed to pay their utility bills and other commitments like credit cards, and then they miss a mortgage repayment. Their whole financial situation is often so tenuous that one stumble and the whole household budget starts to unravel. Mostly this is the reality of too much borrowing, and not enough capacity to repay the loans. There isn’t an easy solution for that.”

David says clients frequently contact the centre when they’re already at crisis point and facing foreclosure. “If they’d contacted a financial counsellor earlier, there could have been better communications with the lender to ensure the borrower’s right to a hardship variation under any relevant industry code or the credit legislation was enforced.”

David says the response of some lenders to borrowers who are in default or clearly close to missing repayments is inadequate. He co-authored a 2007 report that found non-bank lenders, including non-mainstream and ‘predatory’ lenders, as well as larger more well known non-banks, and companies that are the trustees behind these lenders, are involved in a disproportionate number of the court actions to repossess borrowers’ homes (see Non-banks to blame?). He says the sources of funds for this type of lending are often larger, well known and apparently mainstream institutions.

“The ‘warehousing’ [wholesale] type non-bank lenders don’t have systems in place to deal with borrowers experiencing financial hardship,” David says. "They just don’t care. And because the UCCC isn’t strict enough on how lenders should treat borrowers in these circumstances, far too often they can get away with hopeless responses or by just ignoring the customers’ pleas for help altogether.”